Types of Mortgages: VA, FHA & Conventional | Real Estate Exam Prep

Types of Mortgages: VA, FHA & Conventional | Real Estate Exam Prep

– Hey everybody, my
name is Paul Vojchehoske and welcome to The Real Estate
Classroom YouTube channel, before we get to today's
video on the types of loans in real estate, do me a favor
give this video a thumbs up, hit that red subscribe button, click on the notification bell and if you have a comment or question please put it down below
in the comment section. So let's get to today's video. (upbeat music) So in today's video, we're gonna discuss three different types of
loans that are out there. They are the core lending that we see in the real estate profession.

And they're really important
that you not only know them for the real estate licensing exam, but you need to know them for, you know, your real estate practice as well. Now understand we're not gonna
dive into the exact details of each loan, like what are
the percentage of down payments that you're gonna need and percentage of funding
fees and things like that, because those items change all the time and so they're typically not asked on the real estate licensing exam, what I'm giving you is the
things that you need to know for the exam and they're relevant
to the profession as well. But the three types of
loans we're gonna discuss is what we call the Veterans Affairs loan. And that is a typically called
a VA loan in the industry.

We have the Federal Housing
Administration loan, which is commonly known as an FHA loan. And then we have conventional loan, which is basically everything else. Now, when you get into the industry, you're gonna learn that there are probably dozens of other minor
loans, state funded loans and things like that, but we're
not gonna talk about those And typically, the test
doesn't ask you about those. So we're gonna stick to
the three major loan types that you're gonna need to pass your exam. Now the first one I wanna discuss is what we call the Veterans Affairs loan or commonly known in the
industry as a VA loan. Now, this is for eligible
veterans and again, I'm not gonna go into the
eligibility requirements because there are literally
dozens of different scenarios where a veteran can qualify.

So I'm not gonna go down that road, but there are some things, you need to know I outlined
11 different things that you need to know, the first is, the is the no down payment loan. It's one of the best
loans that's out there, the veteran literally can show up with or put zero
money down to qualify as long as they're within their limits.

Now, the VA guarantees this loan, you have to know that for the exam. VA guarantees loans and
when we get to the FHA loan, you're gonna learn that
it's in an insured loan, but VA guarantees the loan
and guarantees the top 25% of the loan and that's
based on what we call the eligibility limit. And if you go to number four, there's what we call a
certificate of eligibility. And that certificate of eligibility is given to the veteran from
the VA, the Veterans Affairs, and it will establish what the limit is. And let me explain that so right now, and you don't have to
know this for a test, but right now, as of the
date of making this video, though, it's about the
eligibility is about $120,000.

So we take that entitlement amount, that's what they call that, that 120,000 is the entitle amount, and we multiply that by four. So that means that the
veteran if they qualify, you know, by, you know, income and those
in debt ratios and whatnot, they're gonna be able to
borrow up to $480,000, all right. Now, remember the VA, they guarantee the top 25% of the loans. So, if the veteran wants to
purchase a $400,000 house, that means the VA is going
to guarantee that lender, the top $100,000. So if the veteran defaults, then the VA is going to guarantee that hundred thousand
dollars to the lender. So it ensures that that lender can then sell the property and recoup their losses. So, that's the great thing
about the Veterans Affairs loan.

Now the borrower must
use a VA approved lender, the VA does require the lender to have certain
qualifications and criteria or meet certain criteria before they can get on the approved list. Number five, there's no MIP or PMI. Now MIP stands for
Mortgage Insurance Premium. And PMI stands for Premium
Mortgage Insurance. And they can be up front
or on a monthly basis, but another great thing is
because the VA is guaranteeing that top 25%, essentially, the lender is only making
a 75% loan to value ratio. So therefore, the PMI or the MIP is not gonna be required for this loan, which again saves that
veteran some extra money.

We're gonna talk more about MIP
and PMI later in this video. There is a funding fee
that the veteran has to pay and again, it changes all the time. So you don't have to know the amount, as of the date of this video, it's at 2.25% of the
amount that's borrowed. So if you borrow the
$100,000, that means $2250 is gonna be what the funding fee is, the Veterans Affairs
funding fee, and that money goes into a pot of money
at the Veterans Affairs to offset defaults. So if there is a default because remember VA guarantees these
loans, then there's money to pay those defaults. Now, if you're working with
a client, that's a VA buyer, ask if they're disabled or not, because if they have a
veteran's disability, then this funding fee is waived. All right, so make sure
you inquire about that. Number seven, VA appraisal, there's gonna be an
appraisal that's required.

Now, it's just a, you know,
run of the mill appraiser that went and got the VA certification. So they are approved by
VA to do VA appraisals. Now the difference between a VA appraisal and let's say a conventional appraisal is the VA is gonna require the appraiser to look at certain things,
like maybe get on the roof and check out the roof where
that wouldn't be required on a conventional loan. Again, these requirements do
change all the time as well.

But the VA appraisal is a lot more strict in as far as the material
condition of the property than conventional. And once the VA goes out, or
the VA appraiser goes out, I should say the VA
certified appraiser goes out and determines the value
and says everything is good, then they're gonna issue a
certificate of reasonable value. That's what the VA requires. Now there is what's
called a VA escape clause. And I have the language
on your screen here. And the the language
does vary a little bit depending on the locality that you're practicing real estate, but it all says the same thing and that is that if this property does not appraise at or above the purchase price, then the the borrower is legally
able to void the contract and get out of the deal.

It also says that if the VA appraiser identifies certain
repairs that must be done and the seller is unable or
unwilling to do those repairs, then again the buyer is
able to void the contract penalty free, meaning they get their, their earnest money back
and those type of things. Now, one thing you have to
know is, if that option happens so it does not appraise. Typically what happens is the
buyer and seller negotiate the difference. Now, either the seller comes
down to the appraised value, or maybe they split it 50/50.

Let's say that it was
$10,000 under appraisal, so the seller comes
down on the price $5,000 or the buyer comes up with
$5,000 extra additional cash and so they meet 50/50,
it becomes negotiable, but if they cannot come to
a negotiated settlement, then the deal is terminated, penalty free. One other thing to know, any
inspection or appraisal fees that the buyer has paid up to that point, the seller is not obligated to reimburse the borrower or the
buyer for those expenses.

So keep that in mind,
it's just a guarantee or a way to protect the veteran. Number nine. Number nine, the VA type
loans require owner occupied one to four residential units. So, the you can't use it to
buy investment properties for single family houses. However, if the veteran
buyer wanted to buy a duplex, a triplex or a fourplex,
that would be okay, but he or she would have
to live in one of the units and then rent the other ones out. There are no prepayment penalty
under federal regulation, which is cool. And then these are assumable loans., they're what we call
qualifying assumable loans, meaning that if someone was
going to assume the loan and that's for assumable loans, we're gonna discuss in a different video.

monthly mortgage insurance premium

But, it would have to be a
qualifying assumable loan, meaning that another veteran
would have to come along and assume the loan and use their certificate of eligibility. Used to be that these were called, VA loans were simple
assumptions, which mean, which meant that anybody
could assume the loan but that changed about 30 years ago. So now they are a
qualifying assumable loan. The next type of loan I wanna talk about is what's called a Federal
Housing Administration loan or commonly known as an FHA loan. There are 10 bullet points
that you need to know for your licensing exam. Number one, FHA loans are insured loans, VA is a guaranteed loan. FHA is an insured loan
and you have to know that for your exam, you just
have to remember the two. The good thing about an FHA loan is FHA loans were developed
and created back in the 1930s, part of President
Roosevelt's the New Deal. Prior to FHA loans,
typically the bank's required 25% down payment, which
was really unachievable by most borrowers even today.

And so FHA loans really
provides a safety net for lower income families and borrowers, because it allows the lender
to make a loan up to 97% of the home value or the loan to value. Sometimes even more than that under certain circumstances, but you really need to
know that allows the lender to make loans up to 90%, 97% of value. All right, so the borrower
must use an FHA appraised or FHA approved lender, just not anybody can do FHA, they have to go through a
certain qualification process. You don't need to know the details other than it has to be
an FHA approved lender. Maybe you have seen HUD
foreclosed properties. This is where, and they
were really popular back in 2008, 2009, 20210 and 2011
during the great recession, but HUD foreclosed properties
are previously FHA borrowers. So if an FHA borrower was foreclosed upon for failing to make their payments, then it becomes a HUD owned property.

Now HUD stands for, don't forget, it's a key real estate term, the house, it's the Department of
Housing and Urban Development. And so because FHA is a
federally, federal loan, a federally backed loan, HUD is the department that oversees FHA. Now the borrower, number
five here, the borrower, key real estate term here, mortgagor, you have to know these two terms. The borrower is legally
known as the mortgagor and the lender is legally
known as the mortgagee with two e's on the end, and I
got them on your screen here.

The borrower is known as the mortgagor, the lender is known as the mortgagee. That's important to remember and it doesn't matter
what type of loan it is, but those are two key real
estate terms you have to know. So the borrower must pay what's called upfront mortgage insurance premium and monthly mortgage insurance premium. So, that FHA borrower, yes,
the bank can lend up to 97%, but there's a cost associated with that.

So, the borrower is gonna
have to pay an upfront fee, insurance premium at the very
beginning, or at closing, and typically that you
don't have to know the value or the ratios but typically
it's a percent or two of the amount that's borrowed,
that's a one time fee. then added on to their PITI payment, which we talked talked about
that in a previous video. PITI is principal and interest, that's the money we're
paying the bank back, taxes and insurance. That's what goes into the escrow account to pay the property taxes and the annual homeowners insurance, but there is an additional, a fifth part of that monthly payment that the borrower is making to the bank, and that is MIP, mortgage
insurance premium.

And it's a fee and you can
see on your screen here, it's added on to the monthly payment. Well, that is to pay that insurance, because that's a higher loan value. Now here's the thing. So keep this in mind, once
the loan to value ratio, maybe a year or two or
three years down the road reaches 80% loan to
value then the borrower can petition the lender
to get the MIP knocked off the loan payment and
there's a process for that which we're not gonna
discuss here, all right. So remember, MIP mortgage
insurance premium, key real estate term you half to know, is associated with FHA loans.

Number six, FHA appraisal required, now just like Veterans Affairs loans that require a VA appraisal, meaning the appraiser is gonna go out and get the certification
to become VA certified to do appraisals for VA loans. Same applies here, an
appraiser is gonna go out and seek the approval to
conduct FHA appraisals. Now, just like VA, there's
gonna be that amendatory clause as you can see, number seven
there, that FHA escape clause or amendatory clause, that's gonna be required to be signed as part of the contract. And it just basically says that if the appraiser goes out and
they determine that the value is not at or above the purchase price, then the deal falls apart
unless they can negotiate some kind of win, win scenario, which means that let's say that the purchase price is 100,000. It only appraises for 90,000. There's a $10,000
discrepancy there in value. So either the seller comes down to 90,000, or they negotiate it, you
know, maybe it's 50/50, as we discussed under Veterans Affairs, so the seller comes
down 5000 on the price, the buyer puts $5,000 more in cash, you know, they bring up the
$5,000 in cash to closing.

So that allows the deal to go forward, that typically doesn't
happen with FHA loans, but it's not impossible. The other thing that happens like VA is the appraiser is gonna go out and look at certain
material condition things on the property. Now FHA guidelines require the appraiser to look for certain things. Is the concrete all cracked up? Is there tripping hazards? Did they get on the roof? Is there exposed wiring? Those type of things, so the FHA appraiser is
gonna look for those things and if they find any of those things, they're gonna note them in the appraisal. And then the seller basically
has to fix those items. If the seller is unwilling or
unable to make the repairs, which sometimes happens, then again, either the deal falls apart, or they're gonna have to negotiate somehow to get those repairs done.

So what you need to know, basically is if the seller
is unable or unwilling to do those repairs, then
the deal blows apart, penalty free, the borrower gets there, they get their earnest money back. Now, just like VA loans, the seller is not required to reimburse the buyer for any fees up to that point. So maybe there's a home
inspection, an appraisal fee. The borrower just get stuck
with that cost, all right. Seven VA, sorry, FHA escape clause, we already talked about that. In fact, they're very similar
to the VA escape clause. It just basically says that if the property
doesn't appraise at or above purchase price or there
are repairs required and the seller is unable
or unwilling to do them, then the borrower is allowed to terminate the contract penalty free. Like VA loans, number eight, it must be owner occupied properties, one to four residential units. Number nine, no prepayment penalties and just like VA loans,
FHA loans are qualifying assumable loans, meaning the, whoever's gonna
assume the existing loan, they have to meet all the FHA requirements before that will happen.

I'm gonna do a video, a different video on how assumable loans work, but you have to know that
they are qualifying assumable. Last type of loan I'm gonna talk about is conventional loans. Now there's two types
of conventional loans, there's insured and uninsured. So unlike VA loans and FHA loans, conventional loans are not
backed up or guaranteed or insured by the government at all. So, if the borrower does
not have 20% down payment, meaning that the lender
is gonna borrow up to 80% of the value, then the borrower is gonna
have to get what's called premium mortgage insurance.

And that is a monthly payment that's added on to the PITI part of the monthly mortgage payment that the borrower is
gonna make to the bank. So we'll have principal and interest, taxes and insurance and then PMI. Now FHA, this is a key
distinction you have to know. FHA is an insured loan. FHA calls it mortgage
insurance premium or MIP. If it's a conventional loan, we call it private mortgage insurance, all right, that's the difference. There's no PMI on an FHA loan, it's MIP, you have to know that,
conventional loans, PMI, FHA loans, MIP.

(bell ringing) And then lastly, there
is gonna be an appraisal that's required, however, as I said before, the you know, the appraiser is less likely to go out and look for those
material condition items like bad roofs and those type of deals, repairs are a lot more lenient
on conventional type loans. Now one of the things
that I would recommend when you're done with this
video, very important here. So you understand how the entire mortgage, the whole infrastructure
of mortgages work, if you have not watched the video on primary and secondary mortgage markets, I highly encourage you to do that.

I'm gonna leave a link
right here to the video. Definitely check that out. And by the way, if you have
not subscribed to the channel, I would definitely appreciate that. Click the little circle to my left and don't forget to hit that
little notification bell. That's all I got for this video,
thanks for hanging with me. I'll see you in our next video..

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